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Securities and Exchange Commission (SEC) Sanctions CEO and CCO of Formerly Registered Investment Adviser for Custody Rule Violations; Accountants Barred from SEC Practice for Failure to Complete Surprise Examination

On December 12, 2013, the SEC issued an order instituting settled administrative proceedings against Mark Wayne, the former President, CEO and CCO of Freedom One Investment Advisors, Inc., an adviser formerly registered with the SEC, for violations of the custody rule under the Advisers Act.

Freedom One had custody of client assets held in two omnibus accounts, one for IRA accounts and one for managed accounts, from 2008 to 2010. According to the SEC’s order, Freedom One hired an accounting firm to conduct a surprise exam in 2008 but the accounting firm never completed the exam. In 2009 and 2010, Freedom One engaged a different accounting firm to conduct surprise exams, but the exams were insufficient because Freedom One told the firm that only the IRA accounts were subject to the exam and thus the exams did not include the managed accounts. The SEC found that Freedom One violated the custody rule for all three years because it took no action to determine whether the independent public accountants it retained to conduct annual surprise exams sufficiently performed those exams. In addition, the SEC found that Freedom One violated the custody rule requirement regarding delivering client account statements. From 2008 through 2010, an affiliate of Freedom One, which was not a qualified custodian, provided quarterly account statements to clients with IRA accounts and managed accounts.

The SEC also found that Freedom One violated the Advisers Act compliance rule by failing to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the custody rule. Freedom One was also found to have violated the books and records rule by failing to record certain Freedom One transactions in its books and records.

Mr. Wayne was found to have aided and abetted Freedom One’s violations. Mr. Wayne consented to the order without admitting or denying the charges. As a result of the findings, Mr. Wayne was barred from acting as the CCO of any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent or nationally recognized statistical rating organization with the right to apply for reentry after one year. The order also requires Mr. Wayne to pay a civil penalty of $40,000.

The SEC not only brought an action against Mr. Wayne, it also brought charges against the accountants who failed to complete the surprise examination in 2008. In an order instituting settled administrative proceedings against them, the accountants, without admitting or denying the charges, agreed to cease and desist from violating the Advisers Act and agreed to a bar from appearing or practicing before the SEC as an accountant.

Sources: In the Matter of Mark M. Wayne, Investment Advisers Act Release No. 3737, (December 12, 2013); In the matter of Rodney A. Smith, Michael Santicchia, CPA and Stephen D. Cheaney, CPA, Investment Advisers Act Release No. 3738 (December 12, 2013). 

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume IV, Number 47


About this Author

Susan Hoaglund, Investment Management Attorney, Godfrey Kahn law firm

Susan Hoaglund is a member of the Investment Management Practice Group. Susan provides advice to investment advisers, investment companies, broker-dealers and banks regarding legal, regulatory and compliance matters.

Chris Cahlamer Investment Management Attorney

Chris Cahlamer is the team leader of the firm’s Investment Management Practice Group, where he practices in investment management and securities law, focusing on investment companies, investment advisers, regulatory examinations, new product development, SEC compliance and reporting obligations, CCO support, private fund formation and operation, investment company reorganizations, investment advisor mergers and acquisitions, and general corporate and board fiduciary issues.

Chris earned his law degree, summa cum laude, at Marquette University Law School. While there, he received the Corporate Practice Institute Award and served as senior articles editor on the Marquette Law Review. He completed his undergraduate education at St. Norbert College, graduating as a member of the honors program and earning his bachelor’s degree, summa cum laude, in international economics and political science.

Chris is a member of the State Bar of Wisconsin and the American Bar Association.

Carol A. Gehl, Securities Law Attorney, Godfrey and Kahn law firm

Carol Gehl is a shareholder and the team leader of the Securities Practice Group in the Milwaukee office.

Carol’s practice is focused on investment management entities, including mutual funds, hedge funds, investment advisers and broker-dealers throughout the nation. During the last number of years, Carol has facilitated the organization of numerous mutual funds, hedge funds and investment advisers; assisted in SEC and FINRA examinations of regulated entities; provided ongoing advice to mutual fund Boards of Directors; and assisted with several mergers of investment advisers and...